WEST YORKSHIRE PENSION FUND
STATEMENT OF INVESTMENT PRINCIPLES
The Statement of Investment Principles has been prepared in accordance
with the Local Government Pension Scheme (Management and Investment of
Funds) (Amendment) Regulations 1999.
City of Bradford Metropolitan District Council became the administering
authority of the West Yorkshire Pension Fund in 1986. The Fund covers the
five District Councils of West Yorkshire together with numerous other
Investment Decision Making Process
The Council has delegated all its functions as administering authority of the
Pension Fund to the Finance Director. The Head of Pensions and
Investments, who reports to the Finance Director, has day to day control of
the management of all aspects of the Fund’s activities. The Finance Director
utilises the Investment Advisory Panel as the vehicle for overseeing the
Fund’s investment functions.
The Panel determines the investment policy of the Fund and has ultimate
responsibility for investment strategy. The Panel undertakes its
responsibilities through taking appropriate advice from external advisers,
supported by the in-house investment management team.
Once investment strategy has been set at the quarterly meetings of the Panel,
the in-house investment management team undertakes sector and stock
selection on a discretionary basis to implement the strategy.
Types of Investments To Be Held
The West Yorkshire Pension Fund will hold investments in Fixed Interest
Securities, Equities, Index Linked Securities, Managed and Unitised Funds
(including Property Unit Trusts), and Cash Deposits, covering all the world
A relatively small proportion of the Fund’s investments will be held in
Emerging Markets, both through direct investments and pooled vehicles. No
direct property holdings are to be held, with the Fund’s investment in
properties being through the purchase of units in Property Unit Trusts. The
Fund will invest in Hedge Funds.
The Fund will not invest directly in unquoted companies, as the Fund’s private
equity investment will be undertaken via a number and mixture of venture and
development capital funds.
Stock lending will be actively pursued up to the 35% limit as permitted under
the Local Government Pension Scheme and Management and Investment of
Funds (Amendment) Regulations 2005. The Investment Advisory Panel
agreed this on 20 October 2005.
The Fund undertakes currency hedging up to a maximum of $100 million at
any one point in time.
Balance Between Different types of Investment
The biggest proportion of the Fund’s investment will be in Equities. This type
of investment bias is intended to maximise growth in the value of assets over
the long term.
Fixed Interest Securities, Index Linked Securities, Property Unit Trusts,
Alternative Investments and Cash Deposits will make up the balance of
investment. The distribution of investments between the asset classes will
vary based on perceived economic and market conditions.
The Fund’s planned asset allocation strategy will be linked to a fund-specific
benchmark, and the Fund will invest within the following control ranges for
each asset class. Depending on market conditions, the Fund may stray
outside the control ranges on occasions before adjustments are made to
rectify the situation.
Bonds - Total 14 – 20
UK Fixed Interest Gilts 2–8
UK Index Linked Gilts 2–8
Corporate Bonds 1–7
Global Bonds 1–5
Equities – Total 67 - 73
UK Equities 37 – 47
Overseas Equities 23 – 33
UK Property Unit Trusts 3–7
Private Equity 0.5 – 2.5
Fund of Hedge Funds 0.5 – 2.5
Investment into Private Equity and Fund of Hedge Funds are being
undertaken progressively, and the control ranges for these asset classes will
be reviewed annually with potential increases over the next three years. As a
result of the progressive increase in Private Equity and Fund of Hedge Funds,
there will be a corresponding reduction in the control range for Cash.
To minimise risk, the investment portfolio of the Fund will be continually
monitored and reviewed, and the portfolio will be well diversified as evidenced
by the fact that the Fund’s equity holdings are spread across more than 300
UK companies, 600 foreign companies, and a range of unit trusts and
Risk will also be controlled by reviewing on an on-going basis the risk
attached to the Fund’s asset allocation relative to the fund-specific
benchmark, so that any major divergence from the benchmark is acceptable.
Mercer Investment Consulting has completed a recent ‘Investment Strategy
Review’ for WYPF, and this has provided details of the risks associated with
adopting the fund-specific benchmark and variations to it.
Custodian risk is controlled through an ongoing monitoring and periodic
review of the custodial arrangements.
Risk is also monitored in relation to the ongoing funding position of WYPF and
the investment requirements that flow from it, in conjunction with the Fund’s
Counter-party and cash management risk are controlled by the in-house
investment management team through the setting of appropriate limits for
exposure with any individual organisation.
Expected Return on Investments
The Fund’s investment portfolio will be actively managed by internal
managers, supported by the external investment advisers, and the Fund’s
annual investment return will be measured against the fund-specific
benchmark. The expected return on investments will be such as to achieve
+0.5% per annum above the fund-specific benchmark annualised over 3-year
rolling periods, and linked to an under-performance limit of 1.5% against the
benchmark in any one year, as measured independently by the WM
Realisation of Investments
The majority of investments to be held will be in fixed interest securities and
equities that are quoted on recognised stock markets, and may be easily
realised if required. The liquidity in other classes varies enormously (for
example in property and private equity).
The in-house team of investment managers utilise a core list of brokers to
provide a dealing service for share transactions undertaken. Commission
paid to all brokers on UK and Overseas share transactions are at competitive
rates negotiated by the in-house investment managers. No soft commissions
or commission recapture programmes are included.
Transaction fees and custody fees are paid to HSBC for overseas stock
market transactions on terms agreed with HSBC under the contract for
The Fund subscribes to the ‘Transaction Cost Measurement Service’ offered
by its custodian HSBC, which provides transaction execution cost
comparisons by country/broker pairing.
Socially Responsible Investment
Investment decisions are taken based on financial and commercial
considerations so as to yield the best return by way of income and capital
appreciation. If it is shown that particular types of social, environmental and
ethical investment can produce at least comparable returns, then the Fund will
invest in such companies as part of the normal investment process.
The voting policy of the West Yorkshire Pension Fund is viewed as a
fundamental contribution towards socially responsible investment. The Fund
is committed to ensuring that the companies in which it has a shareholding
adopt sound principles of corporate responsibility, particularly in relation to
environmental and employment standards. The Fund will utilise the
shareholding wherever possible, through the voting policy and engagement,
to exert influence on those companies falling short of acceptable standards.
The WYPF is a member of the Local Authority Pension Fund Forum, which
currently comprises 32 local authority pension funds with assets of £50 billion.
The Forum exists to promote the investment interests of local authority
pension funds, and in particular to maximise their influence as shareholders to
promote corporate social responsibility and high standards of corporate
governance amongst the companies in which they invest.
The WYPF is also a member of the Institutional Investors Group on Climate
Change (IIGCC). The IIGCC seeks to promote a better understanding of the
implications of climate change amongst its members and other institutional
investors, and to encourage companies and markets in which its members
invest to address any material risks and opportunities to their businesses
associated with climate change and a shift to a lower carbon economy.
Exercise of Rights Attached to Investments
The West Yorkshire Pension Fund will exercise its voting rights at the Annual/
Extraordinary General Meetings of all UK companies within the FTSE 350,
European companies within the Eurotop 300, and US companies in the S&P
500, in which the Fund has a shareholding. The voting policy to be adopted
by the Fund at these meetings will be based on the latest ‘Shareholder
Guidelines’ issued by the Pensions and Investment Research Consultants
Limited (PIRC), an independent adviser to the pensions industry who provide
policy research and analysis on shareholder issues. These ‘Shareholder
Guidelines’ encompass the Combined Code of Best Practice arising from the
Cadbury, Greenbury, Hampel, Higgs and Smith Committees relating to
corporate governance and corporate responsibility.
The Fund will normally take up its entitlement attached to rights issues when
offered at a discount to the current market price.
In 2000, the Government commissioned a ‘Review of Institutional Investment
in the United Kingdom’ by Paul Myners of Gartmore Fund Management
Group. Paul Myners published the outcome of his review in a report in March
2001. In response to the proposals contained in the review, the Government
issued a set of investment principles, and they cover the ten areas of effective
decision making; clear objectives; focus on asset allocation; expert advice;
explicit mandates; activism; appropriate benchmarks; performance
measurement; transparency; and regular reporting.
The extent to which WYPF has adopted these investment principles is as
Effective Decision-Making: the Investment Panel encompasses a range of
expertise, supported by external investments advisers and the in-house team
of investment managers. Greater emphasis is being placed on training for
Panel members, and a number of initiatives on this front have been, and
continue to be, developed. An annual business plan for the Panel is now
Clear Objectives: members of the Panel take a long-term view in setting
investment objectives. Investment objectives are set for the Fund itself which
have due regard to the Fund’s Funding Strategy Statement and for the
managers and external investment advisers in order to encourage added
value commensurate with a measured and controlled level of volatility.
Focus on Asset Allocation: Panel members focus entirely on asset allocation,
with day-to-day stock selection left to the discretion of the in-house investment
managers. The Investment Panel has commissioned independent risk
budgeting and asset liability studies from time to time to provide comment on
the current asset policy being pursued by WYPF.
Expert Advice: the external investment advisers attend all meetings of the
Investment Panel so as to provide the necessary expert advice to support the
Panel members in coming to their decisions.
Explicit Mandates: constraints on the types of investment are in line with limits
expressed in regulations. No explicit mandates are given to the in-house team
of investment managers and to the external investment advisers, although
they are set investment return targets against the fund-specific benchmark.
Specific performance and volatility targets are given to the Fund of Hedge
Fund managers in which WYPF invests.
Activism: the WYPF actively votes its shares in all FTSE 350, the top 300
European, and the US S&P 500 companies, and it will look to extend the
geographical scope of its voting activity wherever possible. WYPF also
engages with companies through its membership of the Local Authority
Pension Fund Forum.
Appropriate Benchmarks: active management is adopted with appropriate risk
controls as reflected in a well-diversified portfolio of investments. From 1 April
2005 the Fund uses a fund-specific benchmark to compare actual asset
allocation and investments returns.
Performance Measurement: the Panel formally monitors the investment
performance of the Fund annually at its October meeting, and an assessment
is made of the in-house investment managers’ and external investment
advisers’ performance against the investment target return. Arrangements
have been put in place for the external investment advisers to assess the
effectiveness of the Panel itself on an annual basis.
Transparency and Regular Reporting: the statement of investment principles
is regularly updated and is included in the Fund's Annual Report and
Accounts, and is also available for viewing on the Fund's website.